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Goldman, BofA Merrill warn U.S. economy is losing momentum

Hopes were high at the start of this year for a hefty first-quarter growth spurt in the U.S. economy.

But some of Wall Street’s biggest banks now are ratcheting back their growth estimates amid disappointing data in recent weeks.

Goldman Sachs economists have been expecting gross domestic product to rise at a real (after-inflation) annualized rate of 3.5% in the first quarter, which would be the fastest pace since the 3.7% growth of the first quarter of 2010.

But on Monday, Goldman warned of “significant downside risk” to its estimate. The reason: Consumers’ real pace of spending has slowed this year.

The government said Monday that personal spending rose 0.7% in February, but that after adjusting for inflation (think: energy and food) the increase was just 0.3%, after a flat reading in January.

Those figures, in turn, imply that real consumer spending for the quarter as a whole will rise at an anemic annualized pace of 1.75% to 2%, Goldman said. That would be a sharp slowdown from the 4% real spending increase of the fourth quarter, when Americans’ mood was brightening.

Bank of America Merrill Lynch economists, meanwhile, have given up on their original growth estimate for the current quarter.

On Friday, BofA Merrill trimmed its first-quarter GDP growth figure to 2.2%, which if accurate would be the weakest pace since the economy grew 1.7% in last year's second quarter.

At the beginning of this year BofA Merrill was predicting 3.3% first-quarter growth.

Ethan Harris, head of developed-markets economic research at BofA Merrill, said the bank was disappointed in the last few weeks by reports showing “very weak” January housing starts, a sharp drop in non-residential construction that month, and February’s decline in orders for capital goods excluding defense and aircraft.

Despite periodic bursts of optimism, the U.S. economy remains in “rehab recovery” that leaves it vulnerable to shocks, Harris warned.